PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis
The unplanned shutdown of the LDPE plant may generate negative sentiment toward PTTGC in the near-term. But we think that any share price downside would present an opportunity to accumulate the stock. Despite the shutdown, we still expect PTTGC to post HoH earnings growth for 2H13, driven by sustained good chemical spreads (supported by high seasonal demand and better demand-supply dynamics) and volume growth. Moreover, there is scope for upside to the long-term earnings profile from potential future investments. The stock currently trades at an FY13 PER of 10.2x, a steep discount to the regional mean of 15.5x.
Unplanned shutdown of the LDPE plant 
Yesterday, PTTGC announced a 3.5-month unplanned shutdown of its 300kta LDPE facility, July 10-October 25, in order to repair a cylinder in the booster/primary compressor. The outage is a precautionary measure; a defect was found during a routine inspection.  
Mitigation plans are in place  
PTTGC will mitigate the effect of the shutdown on both its customers and its earnings profile by using LDPE resins from its inventory and, if necessary, by importing supplies for contracted customers. Also, as the LDPE plant shutdown will mean an excess supply of Ethylene feedstock, the firm will need to manage this excess Ethylene within the group and sell it on the open market. Fortunately, for much of the period that the LDPE plant is idle, the I4-1 olefins plant is scheduled for a 44-day turnaround (August 1-Sept 13). As such, there won’t be a massive amount of excess Ethylene volume to manage.
Expect only minimal impact on FY13 earnings 
Taking into account the LDPE production loss together with the implementation of mitigation plans, we estimate that the negative impact on PTTGC’s FY13 earnings will be minimal. We have revised down both our FY13 core profit and net profit forecasts by 2% to Bt35,991m and Bt32,726m, respectively. We think that the actual impact on earnings is likely to be less than our estimate, as PTTGC is covered by “machinery breakdown and business interruption Insurance. The company and its insurance company are currently in the process of appraising the value of the claim.